Loan moratorium or “Deferred payment scheme”?

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By Datuk Chang Kim Loong

No Compounded Interest, No Penalty Charges in new Loan Moratorium: MOF’s Tengku Zafrul – 29.6.21

‘The loan moratorium (six-months) announced under the RM150 billion PEMULIH stimulus package will not be interest free’, Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz said. 

Tengku Zafrul, however, said banks would waive compounded interest and penalty charges for borrowers who take up the loan moratorium.

He said the moratorium was put in place to assist borrowers in deferring their repayment to a later date and that the method of repayment as well as interest charges was “between the borrowers and the bank”.

“The moratorium that we announced (in PEMULIH) is the same as the moratorium we announced before – it is not interest free.

Caveat Emptor – Catch of the ‘Loan Moratorium;

The initiative of ‘loan moratorium’ to provide financial relief by deferring loan repayment by 6 months was initially well-commendable. However, after further scrutiny, it does not seem to achieve its underlying original intent to help the rakyat who are struggling. After the moratorium period, the borrowers have to service the deferred installments plus other additional interest/ profits as the loan moratorium is not ‘interest free’. The moratorium is actually a deferred payment scheme for 6 months, whereby additional interest/ profit is added to that amount.

2020 moratorium

In the first round of moratorium in year 2020, many were caught ‘off guard’ when at the end of the moratorium, the bank slapped the borrowers with additional interest over the 6 months period of the blanket automatic moratorium, irrespective of whether they applied for it or not, or even if one continued to duly service the regular loan repayment.

It was later unveiled that any loan repayment during the moratorium period was treated as an ‘overpayment’ of loan repayment and the amount ‘overpaid’ was not used to reduce the number of loan instalments during the moratorium period. Automatically, the bank continued to charge interest on the cumulative loan repayment ‘suspended’ during the 6-months loan moratorium period, irrespective of ‘overpayment’. Furthermore, most banks require the borrower to make an application for the bank’s approval for such ’overpayment’ to be offset against the principal.

Instead of an ‘interest-free’ loan moratorium (layman’s perspective), the moratorium appeared to not have benefited borrowers as banks had taken advantage of the situation by charging another round of interest, over and above the original loan sum which was deferred, hence worsening borrowers’ financial situation rather than alleviating their financial burden. A majority were not aware as banks did not provide any notification or any options to the customers, leaving it entirely to individual’s awareness – ‘caveat emptor’. Similar to the 2021 moratorium, it did not reduce borrowers’ lending costs as it was not ‘interest-free’ and hence, interest continued to be charged during the moratorium period. Ultimately, borrowers ended up paying more to the banks after the loan moratorium period ends, leaving many feeling cheated and shortchanged.

2021 moratorium

The current moratorium, year 2021 is not automatic and requires an ‘opt-in’ instead. While this is commendable, the terms are not exactly clear especially with respect to interest charged and other conditions applicable, all of which should have been made transparent from the onset. The banks should be put under obligation to duly inform borrowers in writing to enable them to make an informed decision.

Superficial help

We just spoke to a friend who is a retired employee of Bank Negara Malaysia (BNM). This is what he had to say about the loan moratorium thingy, verbatim:

♣        “In a lot of ways, the banking industry is similar to the gambling industry:

♣        The House will always win. Borrowers never stood a chance”.

While some of us knew this all along, it is no less shocking and heartbreaking to see how banks, unless proven otherwise, chose to treat their customers during their time of need, under the guise of helping them in their darkest hour.

Loan Moratorium: Exploiting desperate borrowers in their time of need?

An ex-CEO of a bank recently gave a talk on the loan moratorium issue. He clarified how there is no such thing as a ‘free lunch’ when banks (including Islamic banks) are involved. He further elaborated how the purported ‘loan moratorium’ for hire purchase and mortgage loans will result in borrowers having to pay extra interest/ profit to the banks.

Stating the obvious, he advised distressed borrowers to think twice before opting in. He also commented that this time around, the banks have wisen up and hence, the hire purchase moratorium will now result in borrowers having to pay extra interest/ profit to the banks (unlike last year’s moratorium).

What is the key takeaway from all of this,’ I asked him? During good times, banks will make profit out of their borrowers whereas during bad times, banks will make more profit out of their borrowers.

In the final analysis, its best to avoid the loan moratorium for housing/ mortgage loans if you can afford it as:

  • Banks will continue to charge interest/ profit during the said 6 months period. The interest charged is not suspended.
  • Borrowers will end up worse than when they first started as they have to pay more interest/ profit to the banks (in addition to having to pay the 6 months repayments which are deferred).
  • Borrowers should ask their banks for a detailed computation/ illustration as to the ‘extra interest’ they have to stomach if they were to ‘opt into’ the 6 months’ deferred payment scheme.

For instance, Abd Latiff has remaining RM300,000 in his Housing Loan with an effective interest of RM3.25% pa. with a monthly instalment payment of  RM1,702. Assuming Latiff does not take the loan moratorium program, his remaining interest to be paid for this housing loan is RM108,331.

Latiff needs to be made aware of what is the additional interest that he will have to pay as a result of the loan moratorium as it was reported that ‘normal interest will continue to accrue’.  How is this normal accrued interest going to be calculated and what is the impact on Latiff’s monthly repayment? Based on the website of a leading bank, the impact to Latiff applying for the Loan Moratorium are as follows:

Housing loan scenario

By applying for the 6-months Loan Moratorium, Latiff will incur additional interest charges of RM8,993 or approximately 8.30% over his original loan.  This additional interest charge of 8.30% is excessive for just a loan moratorium of only 6-months.  The Banks must clearly explain how can taking a loan moratorium for only 6-months increase your total interest payable by a staggering 8.30%.

The bank has also illustrated the potential impact of the loan moratorium on a hire purchase loan with a monthly instalment of RM529 with remaining principal amount of RM37,081 and remaining tenure of 84-months at an interest rate of 3.0% p.a..

Hire purchase scenario

By applying for the 6-months Loan Moratorium for his Hire purchase loan, Latiff will incur additional interest charges of RM822 or approximately 6.76% over his original loan.  This additional interest charge of 6.76% is still excessive for just a loan moratorium of only 6-months. The Banks must clearly explain how can taking a loan moratorium for only 6-months increase your total interest payable by 6.76%.

HBA’s suggestions

Tengku Zafrul reportedly believes that the domestic financial system will be able to manage the impact of loan repayment deferment. ‘While the banks will be affected by the loan moratorium, I think they will be in a position to support given the strong capital buffers that they have,’ he said.

Hence, may we humbly suggest that BNM/ Banks consider the following?

  1. Be transparent to the public that interest will continue to accrue during the moratorium period (which means borrowers will end up paying more to the banks after the loan moratorium period ends). The banks should be transparent and show their borrowers the computations/ illustrative example like those on the reverse side of our credit card statement. It should be in simplified figures in a table for borrowers to understand better.
  2. Tweak the loan moratorium scheme so that the moratorium period is really ‘interest-free’ whereby interest will no longer continue to be charged (which means borrowers will pay the same amount of monthly repayments to the banks after the said period ends). It has a negligible impact on banks’ earnings but will alleviate the financial burden of the borrowers.
  3. Exercise some Corporate Social Responsibility towards the eight million borrowers applying for the moratorium. Several banks are enjoying record profits despite the Covid-19 pandemic as evident from their first quarterly report profit after-tax. Acknowledge the fact that our fellow Malaysians are facing reduced or no income while many businesses are facing drastically reduced cash flow with closures being a real threat.
  4. Repackage the existing loans including rescheduling and restructuring the financing to suit the specific financial circumstances of the borrower in current hard times without the need to provide supporting documents.
  5. No matter what you call the borrowers, they are still your valued customers who have supported the banking industry in one way or another. NB: Banks have spent millions in advertising and promoting their products to ‘attract’ customers.

While we understand the need for banks to cover their borrowing costs and generate satisfactory returns to their shareholders as they are commercial entities and are profit-oriented, it doesn’t seem morally right to us that they are allowed to make a fortune from borrowers/ customers’ misfortune especially in this global pandemic.

To borrowers taking this moratorium exercise, HBA urges such borrowers to put the cash flow saved into good use and not to splurge on any unnecessary expenses as this is only a temporary measure and monthly instalments at a higher cost must commence after the expiry of such a moratorium or rather ‘deferred payment’ exercise.

This article is written by Datuk Chang Kim Loong, Hon. Sec-Gen of the National House Buyers Association (HBA), a non-political, not-for-profit Organisation manned wholly by volunteers. Their link: www.hba.org.my

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